Estate Planning for U.S. Citizens in Canada

    istock last will

    Written by Max Reed

    Ben Franklin famously said that nothing in life is certain except death and taxes. One wonders, then, what Franklin would say about taxes due on death? US citizens living in Canada are subject to two different tax regimes on their death. For them, it would seem that Ben Franklin was doubly right.

    Consider Rajit, an elderly single US citizen who lives in Montreal. His estate is made up of his principal residence worth USD $2 million, an RRIF worth USD $2 million, and a Canadian stock portfolio worth USD $2 million. When he dies his estate will be subject to a Canadian deemed disposition and the US estate tax.

    The US estate tax is imposed on US citizens in Canada. The total value of Rajit’s estate will be used to calculate his estate tax liability. There is, however, a lifetime USD $5.43 million (the 2015 amount) estate and gift tax exemption. At death, the first USD $5.43 million of his estate is exempt from tax. The remaining USD $570,000 will be subject to the US estate tax.

    Assuming a 40% tax rate Rajit’s estate will have to pay USD $ 264,000 of estate tax. Any taxable gifts Rajit made before his death would reduce the value of his exemption and may result in more estate tax. Let’s say Rajit gave USD $430,000 worth of stock to his son a few years ago.  He would have used up USD $430,000 of his lifetime estate and gift tax exemption and only $5 million would remain.

    Rajit’s estate will also be subject to the Canadian deemed disposition, meaning it will have to pay tax on the capital gains on all assets. To calculate the capital gain Rajit will have to subtract his basis in the assets (overly simplified — what he paid for them) from their current fair market value. Let’s say that Rajit paid USD $1 million for his stock portfolio which has doubled in value. The estate will have to pay Canadian tax on USD $1 million. Because it is his principal residence, Rajit’s house is exempt from the Canadian deemed disposition.

    Death taxes in Canada and the US are different. Rajit may be able to use the Canada-US Tax Treaty to offset some of the tax in both countries. For dual citizens, strategies to reduce the tax payable at death have to work in both countries. Some common Canadian strategies don’t work in the US and vice-versa. If Rajit gives up his US citizenship before his death, he may not be subject to the estate tax. Rajit must be careful, however, to follow the proper process to avoid the exit tax imposed when Americans give up their citizenship, and to avoid being considered a “covered expatriate” (this is discussed in another column in this series). He should get professional tax help.

    Taxes on death, to paraphrase Franklin, may be certain, but some planning may reduce the double taxation.

    Real Estate Ownership for U.S. Citizens in Canada

      istock real estate

      Written by Max Reed

      Owning real property on both sides of the border can create a confusing tax situation.

      Consider this example. Stefan and Jane are married and live in Vancouver. Jane is a Canadian citizen while Stefan holds both US and Canadian citizenships.  In 1994,  shortly after getting married they bought a house for $250,000 (all figures Canadian for simplicity’s sake) which they own jointly. Thanks to the Vancouver housing market the house is worth $2.25 million. Their increased net worth prompted Jane to buy a condo (in her own name) in Arizona, next to Stefan’s favorite golf course.   

      Now Stefan and Jane might owe some US tax if they want to sell the house or the condo. Under Canadian tax rules, the sale of their principal residence — their house — is free of capital gains tax (the tax due when an asset you own has appreciated in value).

      American rules are different, and as a dual citizen, Stefan is subject to both US and Canadian tax rules. In this case, the gain on the house would be $2 million (the purchase price of $250,000 is subtracted from the sale price of $2.25 million to arrive at the capital gain).  Stefan’s half of that is $1 million. Under US tax rules, Stefan is allowed to exclude $250,000 worth of capital gain income from tax. But that leaves $750,000 of capital gain income that is still subject to tax at a rate of 23.8% (approximately $178,500 of tax due). This might come as a surprise to Stefan and Jane. Like other couples, they may have thought — correctly under Canadian rules — that the sale of their principal residence was tax free. To avoid the American taxes, Stefan may be able to give his share of the house to Jane prior to the sale (and preferably years before the sale), but he should consult with a tax advisor before doing so as this will have US gift tax implications.

      Stefan’s ownership of the house isn’t the only US tax issue the couple has to grapple with. Jane owns a condo in the US. If she sells this condo, she will have to pay both US and Canadian capital gains tax on the sale. However, she can use the US tax paid as a credit to offset the Canadian tax on the sale.

      American estate taxes are another potential problem. Jane is Canadian, but because the property is located in the US, her estate may be subject to American estate taxes if she still owns the condo when she dies. US rules exempt the first USD $60,000 of property that Jane owns in the US from US estate tax. The Canada-US Tax Treaty offers further relief that should prevent Jane from owing US estate tax. If she does have some exposure, there are strategies (including owning the US property through a trust) that Jane can use to reduce her exposure to US estate tax. The tax issues surrounding the ownership of US real estate are complex, so the couple should seek professional tax help before purchasing property.  

      Jane and Stefan need to pay careful attention to the tax rules so that their real property doesn’t become a real tax problem.

      U.S. Tax Implications of Canadian Registered Plans

        istock rrsp

        Written by Max Reed

        Canada has a raft of registered plans. They all have different US tax consequences.

        Consider the following example. Julia is a US citizen living in Canada. She has an RRSP to save for retirement. She uses her Tax Free Savings Account to invest in some individual stocks. She has an RESP and an RDSP for her disabled son, Julio. When doing her annual US tax return, Julia can’t figure out what to do with all of these different accounts.

        There are two pieces to the puzzle: reporting the income and reporting the existence of the account. The RRSP is the easiest, because for tax purposes, retirement savings plans function the same way in the US as in Canada. The tax on income that builds up inside the plan is deferred until the money is taken out. Under a recent IRS ruling, if Julia is filing US taxes through the amnesty program (the streamlined program) then she will need to file Form 8891 each year in order to defer the tax and report the account. If Julia is all caught up on her US taxes, however, she no longer needs to file that form every year.  

        Julia’s other plans create more complications. For US tax purposes, income that builds up inside TFSA, RESP, and RDSP accounts is taxable. Let’s say that in one year, Julia earned $1000 in dividends in her TFSA. In Canada, she would not have to pay tax on this $1000. But in the US, this income is not protected and she has to pay tax on it. The same would be true if the $1000 was earned in an RESP or RDSP.  If Julia were married to someone who is not an American, she could put the RESP or RDSP in her spouse’s name. However, depending on its value, transferring an existing plan might constitute a gift under the US tax rules so Julia should consult a tax advisor first.

        Figuring out how to report these plans is a bit tricky. The IRS hasn’t clarified its position. In Canada, many of these plans are organized as trusts, and therefore the conventional wisdom is that they are also trusts under US law.  This means a US citizen in Canada has to file the complicated 3520 and/or 3520A forms every year. However, a detailed technical analysis suggests that TFSA, RDSP, or RESP plans are not trusts under US law, thus sparing US citizens in Canada the pain of filing the 3520 and/or 3520-A annually.

        So how should Julia report her various plans on her annual US tax return? Julia can attach a letter to her annual US tax return which describes the plans, states that the income earned has been reported on US Form 1040, recognizes that the IRS hasn’t been clear on how they want these plans reported, and asks the IRS how to report these plans in the future. If audited, Julia would simply tell the IRS she didn’t know how to report the accounts and has written a letter telling them the plans exist. Such an approach may protect her from any IRS penalties, as she has made an effort in good faith to report accounts for which the IRS has not provided an official form.

        In Canada, registered plans shelter income. With the exception of the RRSP, under US tax law they do not — but they don’t necessarily need to be avoided just because of the hassle of reporting them.

        Canadian Mutual Funds Cause U.S. Tax Problems


          Written by Max Reed

          Common Canadian investments can inadvertently cause American tax problems for US citizens living in Canada.

          Let’s take a really common example. Jack is a 50-something US citizen married to Jill (a Canadian citizen) for 30 years. They have lived in Canada for 25 years. Jack was vaguely aware that he was supposed to be filing US taxes every year, but he didn’t.

          When Jack started reading about the new US FATCA law, he learned that his bank would soon be sending his financial information to the IRS by way of the CRA.

          Jack started to comply with his US tax obligations and in the process, discovered that his retirement portfolio, which comprises of Canadian mutual funds and ETFs held outside of an RRSP, might cause him problems.

          There are strategies that can be used to help someone in Jack’s situation. For instance, Jack might also be able to gift some of these problematic investments to his wife, who is not a US citizen.  

          Jack’s situation is avoidable with some foresight and planning. Canadian mutual funds and Canadian listed ETFs are likely classified as a passive foreign investment company (PFIC) under US tax law. The IRS has not taken a clear position on this, and there may be some exceptions to the rule for older funds. If the investments are classified as PFICs and are held outside of an RRSP/RRIF, they must be reported. The form for doing so is complicated.
          Furthermore, there are punitive tax consequences for owning such an investment. For instance, when the investment is sold, the capital gain is taxed at up to 35% or 39.6% (depending on the year).  Compound interest is charged on the tax owing stretching back to the date of purchase. There are strategies available to manage this headache are complicated and likely require the services of a tax professional. The simplest solution is to not own Canadian mutual funds and Canadian listed ETFs outside of an RRSP if you are US citizen.

          If owned inside of an RRSP, these investments are much less problematic. Recent IRS rule changes have eliminated the annual reporting requirement for such investments. The Canada-US Tax Treaty (an agreement between Canada and the United States that helps sort out some of the thorny cross-border tax issues) allows US citizens in Canada to defer any tax owed on income accrued inside the RRSP until the time of withdrawal. Many advisors agree that this deferral provision likely negates any of the punitive taxes that result from the classification of Canadian mutual funds and ETFs as PFICs — but only if the investments are sold before they are taken out of the RRSP. Importantly, this is not true for other Canadian registered plans such as TFSAs, RESPs, or RDSPs.  These plans generally do not work as designed for US tax purposes.

          To avoid Jack’s situation, US citizens in Canada should exercise care in making their investment choices. Tax advice should be obtained as necessary.

          Getting Rid of Your U.S. Citizenship

            istock americaflag

            Written by Max Reed

            Many US citizens in Canada want to be rid of their citizenship to avoid being subject to American tax rules.

            Let’s use an example. John is a Canadian citizen who lives in Ottawa. His mother was American, so John is a US citizen too. He keeps reading in the paper that as a US citizen living in Canada, he’s subject to US tax rules. Having lived in Canada all of his life, he’s annoyed that he has to file extra tax returns. So he marches down to the American Embassy, pays the $2350 (the current fee) and renounces his US citizenship.  

            Before deciding to wave goodbye to the USA, John should know that Uncle Sam will want to try and collect one last income tax before letting John leave. This “exit tax” is levied on the difference between John’s basis in all of his assets (essentially what he paid for them) and their current value. The precise way that the exit tax is calculated is quite complicated, but the bottom line is that John might find it very expensive to renounce his American citizenship.

            John has to pay the exit tax if a) the average US tax he owes exceeded USD $160,000 a year over the past 5 years, or b) his total assets on the date he gave up his citizenship exceed USD $ 2 million, or c) he hasn’t been tax compliant for five years.

            If John was a dual US/Canadian citizen at birth, he could avoid the exit tax, regardless of his total assets, if he files US tax returns for the last five years. In short, John has to come clean with the IRS to get out of the US tax system. John can file three years of past US tax returns under the streamlined program that was discussed in an earlier column. He would then file tax returns for two future years. With this, John would be tax compliant for five years and may be able to avoid the exit tax.

            For John, the advantages of giving up his citizenship are obvious — no more tax problems. But there are also downsides. John can no longer vote in US elections, rely on US consular services abroad, or live and work freely in the US. John might also be subject to future problems at the border. The 1996 Reed amendment gives the US Attorney General the power to deny entry to former US citizens who have renounced their citizenship for tax reasons. This law has rarely been applied, but it remains on the books. Some US lawmakers have tried, without success, to pass harsher versions of it. It’s hard to say what future laws will look like.

            Some Americans who have renounced their citizenship tell stories of being hassled at the US-Canada border, but the vast majority report no problems. They simply enter on their Canadian passport like the millions of other Canadians who enter the US every year.

            FATCA’s Impact on Canadians

              istock fatca

              Written by Max Reed

              The US Foreign Account Tax Compliance Act (FATCA) has made waves in Canada since the 2014 federal budget made it Canadian law. It obliges financial institutions to report the accounts of US citizens to the Canada Revenue Agency, which passes the information on to the IRS.

              Consider this example. Vangie is an American citizen born in Denver who moved to Calgary when she was young. She’s not compliant with her US taxes. Her consulting business has clients on both sides of the border. Vangie has personal and business bank accounts with RBC. FATCA affects both.  
              Under FATCA, RBC is obliged to report Vangie’s personal accounts to the IRS. Because Vangie was born in the US, RBC will likely ask Vangie to complete a Form W-9, to certify that she’s a US citizen. Simply filling out this form shouldn’t cause Vangie to panic — even if she is behind on her US taxes.  This is just the first step in a long, winding road by which Vangie’s information will make its way to the IRS. While determining what exactly gets reported is complicated, accounts worth less than $50,000 and Canadian RRSPs, TFSAs, RESPs, and RDSPs should not be reported.

              It’s not entirely clear what the IRS will do with the information it receives from the thousands of financial institutions all over the world required to report to it. That’s a lot of information to sort through. Processing it will take time. Theoretically, the IRS could easily cross-reference the detailed information it receives through FATCA against the list of people who file US taxes and send out letters to those who are not filing. Postage is cheap. Flying an IRS agent to Canada to conduct an examination is the opposite of cheap. Most US citizens in Canada won’t owe US tax. So even if the IRS did start aggressive enforcement, which they currently do not do, it’s not clear how much money they would collect. For someone like Vangie, the cautious course of action is to get caught up on her US taxes before the IRS gets her information through FATCA.  

              FATCA will affect Vangie’s business as well. Since she does business in the US, she may receive Form W-8-BEN-E which looks, and is, pretty complicated. It may require Vangie to determine the FACTA classification of her business. Businesses filing this form for the first time should consult a professional tax advisor. After the initial determination has been made, the information can simply be replicated on all future W-8-BEN-E forms.

              As a US citizen and person doing business in the US, Vangie to have more paperwork as a result of FACTA.  But she doesn’t have to fear FATCA — like all other new laws it can be dealt with.

              Canadian Mutual Fund: US PFIC?

                istock bank

                Written by Max Reed

                Canadians have invested over a trillion dollars in mutual funds, but the IRS has not issued guidance on how the estimated 1 million US persons in Canada should report mutual fund investments on their (mandatory) US tax returns. The general view is that a Canadian mutual fund is a corporation and may be classified as a passive foreign investment company (PFIC) for US tax purposes. A PFIC is defined under Code section 1297(a) as a foreign corporation for which 75 percent of its annual taxable income is passive income (dividend, royalty rent, capital gain, and annuity income) or at least 50 percent of its assets produce passive income. Owning an interest in a PFIC entails complex reporting requirements and exposes the US-person owner to punitive tax consequences, including: 1) the distribution or gain on sale may be required to be spread over the years the investor held  the investment; 2) the amounts allocated to years before the current taxable year are taxed at the highest ordinary income rates in effect for those years (currently 39.6% plus any state and local taxes); and 3) the IRS collects interest as though these amounts had actually been taxed in the prior years and the taxpayer simply failed to pay the tax until the year in which the excess distribution or sale occurs. A mutual fund manager may be able to, and in light of the potential fiduciary duty owed by the fund to its investors probably should, elect to treat a Canadian mutual fund trust as a partnership for US tax purposes and thus eliminate the risk that it is a PFIC

                Is a Canadian mutual fund a corporation for US tax purposes? A Canadian mutual fund is clearly a foreign (non-US) entity for US tax purposes. There are two different types of Canadian mutual funds:  mutual fund corporations and mutual fund trusts. Under the Income Tax Act, a Canadian mutual fund corporation is incorporated as a Canadian public corporation. Under Treasury regulation section 301.7701-2(a)(8), a Canadian corporation is a per se corporation for US tax purposes. Although the PFIC determination is made fund by fund, a mutual fund generally earns a great deal of passive income from the securities that it holds and owns a high percentage of assets that produce passive income, and is thus likely to be a PFIC.

                Most Canadian mutual funds are mutual fund trusts for Canadian tax purposes and their US tax classification is less straightforward than it is for a mutual fund corporation. The US entity classification regime is complex, but generally an entity may elect its classification if it is not a trust for US tax purposes, does not meet one of the seven definitions of a corporation, and is not specifically addressed elsewhere in the Code and regulations. A Canadian mutual fund trust is not a trust for US tax purposes because it has a profit motive, the trust interests are transferrable, and the trustee can vary the trust investments. Moreover, a Canadian mutual fund trust does not meet any of the seven definitions of a corporation and is not specifically addressed in the Code or regulations. Thus a Canadian mutual fund trust is probably a “foreign eligible entity” as defined in Treasury regulation section 301.7701-3(a) and can elect to be a partnership or a corporation for US tax purposes, commonly known as a check-the-box election. In the private letter ruling PLR 200752029, the IRS accepted that a mutual fund trust from an unnamed jurisdiction was classified as a “foreign eligible entity” that could elect to be treated as a partnership or corporation for US tax purposes. The PLR is not on all fours because it does not identify the mutual fund trust’s country of origin, but it does corroborate the conclusion that a mutual fund trust generally falls into the regulatory definition of “foreign eligible entity”. Electing to be treated as a partnership for US tax purposes eliminates the potential exposure to the PFIC rules for a US investor in a Canadian mutual fund trust. 

                In the absence of a check-the-box election, the default classification of a Canadian mutual fund trust is likely to be as a corporation for US tax purposes. In Chief Counsel Advice 201003013, the IRS concluded that a Canadian mutual fund trust was a corporation for US tax purposes. Under Treasury regulation section 301.7701-3(b)(2)(i), unless it elects otherwise a foreign entity that has two or more owners – all of which have limited liability – is classified as a corporation for US tax purposes. A Canadian mutual fund trust is a foreign entity that has more than two owners – it generally has many investors – all of which may have limited liability:  many mutual fund trusts are organized in Ontario and under the Ontario Trust Beneficiaries’ Liability Act the beneficiaries of a trust that is a reporting issuer under the Securities Act (such as a Canadian mutual fund trust) is not liable for an obligation or debt of the trust. Thus unless the fund itself elects to treat the mutual fund trust as a partnership for US tax purposes, a Canadian mutual fund trust is most likely to be a PFIC and its US-person investors are exposed to negative US tax consequences.

                Under the Income Tax Act a mutual fund trust must be an inter vivos trust resident in Canada. The mutual fund manager acts as a trustee and owes a fiduciary duty to the beneficiary investors of the trust that it administers, just like an ordinary trustee. (See Dobbie v. Arctic Glacier Income Fund et al  2011 ONSC 25 at para. 55 , and the Ontario Securities Act section 116; Mackenzie Financial Corporation (Re), 2008 CanLII 66161 (ON SEC); and Fischer v. IG Investment Management Ltd. [2010] OJ No. 112, which was overturned but not on this point in Fischer v. IG Investment Management Ltd. 2011 ONSC 292.) Owing a fiduciary duty means that the manager must act in the trust beneficiaries’ best interests, which may encompass informing the US-person investor of the potential US tax risk associated with the investment and electing to treat the mutual fund trust as a partnership for US tax purposes to eliminate the risk of a PFIC classification.

                Currently FATCA appears to enhance a mutual fund manager’s liability risks for breach of fiduciary duty and makes the risk-reduction issue even more urgent. A Canadian mutual fund is a Canadian financial institution under the Canada-US FATCA intergovernmental agreement and thus must report information on US account holders to the CRA, which in turn must pass the information on to the IRS. Legally and economically, a mutual fund manager has little choice but to comply with FATCA. By providing the IRS with information about US account holders, a mutual fund manager increases the risk of IRS enforcement against its investors because, for the first time, the IRS may have knowledge of an investor’s holdings. The increased chance of IRS enforcement due to FATCA disclosure may increase the investors’ US tax risk, and the Canadian mutual fund manager should be aware of the risks. Regardless of a legal obligation to do so, in the current environment a mutual fund trust may wish to elect to classify itself as a partnership for US tax purposes in order to relieve its existing US person investors of an expensive tax problem and make the fund more attractive to US investors. The PFIC problems for these US-person investors in Canadian mutual fund trusts can and should be solved with an election.

                TFSA: US Tax Classification


                  Written by Max Reed

                  The TFSA allows savings to earn tax-free investment income (section 146.2(1)), but causes issues for the estimated 1 million US persons in Canada who must report TFSA income on their US tax returns and pay any related tax. Unlike for the RRSP, there is no official IRS guidance on the TFSA and the IRS has not responded to requests for clarification on proper reporting procedures for TFSAs; other advisors indicate that the IRS will not issue a private letter ruling on the matter.

                  A TFSA is generally assumed – incorrectly – to be a foreign trust for US tax purposes that requires the filing of a form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and a form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. Arguably, a TFSA is not an entity separate from its owner for US federal tax purposes and no additional reporting is necessary. Even if a TFSA is a separate entity, it should be treated as a disregarded entity for US tax purposes and a form 8858 filed.

                  Not an RRSP. The conventional wisdom that a TFSA is a foreign trust is based on an analogy to the IRS tax treatment of an RRSP. Without the substantiation of legal concepts, in notice 2003-75 the IRS classified an RRSP as a foreign trust. The IRS position on an RRSP and a RRIF does not automatically apply to a TFSA, which is created under different statutory and contractual arrangements. A TFSA functions more like a normal bank account, and less like a trust, than an RRSP does. Withdrawals from and contributions to a TFSA are almost instantaneous compared to the financial institution’s involvement in RRSP transactions. Unlike a TFSA, tax is withheld on RRSP withdrawals and receipts are issued by the financial institution for most RRSP transactions.

                  Not a separate entity. The Code’s entity classification regime under regulation 301.7701-1 to -4 only applies to entities that are separate from their owners. One indicator of this separation is the existence of a contractual arrangement under which the participants carry on a trade, business, financial operation, or venture and divide the resulting profits. A TFSA is a contractual arrangement between two parties, but the TFSA holder does not divide the TFSA returns (profits) with the sponsoring financial institution.

                  The IRS has issued rulings on whether an entity is separate from its owners. Rev. Rul. 2004-86 says: “Generally, when participants in a venture form a state law entity and avail themselves of the benefits of that entity for a valid business purpose, such as investment or profit, and not for tax avoidance, the entity will be recognized for federal tax purposes.”A TFSA does not have a business purpose: its only purpose is to minimize Canadian tax. In ASA Investerings Partnership (201 F. 3d 505) the DC Circuit said that “the absence of a non-tax business purpose is fatal” to the classification of an entity for US federal tax purposes.

                  Revenue ruling 2004-86 also identifies characteristics that make a Delaware statutory trust (DST) an entity separate from its owners, characteristics not all shared by a TFSA: (1) Unlike the DST, it is unclear whether under local (Canadian) law a TFSA is recognized as separate from its owners. (2) Creditors of the DST owners may not assert claims directly against the property held by the entity: a TFSA’s property is not protected from claims by the owner’s creditors. (3) Unlike a TFSA, a DST may sue or be sued and is subject to attachment and execution as if it were a corporation; only the TFSA’s sponsoring financial institution or its holder may be sued. (4) The DST’s beneficial owners have the same limitation of liability as corporate shareholders, a limited liability that does not inure to a TFSA holder. (5) The DST can merge or consolidate with or into other entities. Property can be transferred from one TFSA to another, but it is unclear whether a TFSA can be merged or consolidated with another TFSA; moreover, a TFSA cannot be merged with a non-TFSA.

                  If a separate entity, not a trust. If an entity is separate from its owner, it is subject to the entity classification regime unless it is specifically classified in the Code or regulations: the TFSA is not. A TFSA also does not meet the definition of a trust for US tax purposes. A foreign trust is defined in Code section 7701(a)(31)(B) as any trust that is not domestic. A trust is defined in regulation 301.7701-4(a) as an arrangement in which the trustee “take[s] title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts”. A bank does not take title to property deposited into a TFSA. A statutory pre-condition to the establishment of a TFSA (ITA section 146.2(2)(e)) is that at the customer’s direction the financial institution “shall transfer all or any part of the property held in connection with the arrangement (or an amount equal to its value) to another TFSA of the holder”,  a right that assumes that the customer retains title to the property.

                  Moreover, Rev. Rul. 2013-14 said that a Mexican land trust (MLT) arrangement was not a trust under regulation 301.7701-4(a) because the beneficiary retains control over the property and is obliged to pay any related taxes. The same is true of the TFSA and it is thus not a trust: even if the financial institution takes title to the property, the TFSA holder retains control over the property and is obliged to pay any related (US) taxes.

                  Possibly a disregarded entity. Classification of a TFSA involves further steps. (1) A non-trust’s classification is determined by reference to the number of members: with two or more members, it is a partnership or a corporation; otherwise it is an association that is taxable as a corporation or is a disregarded entity. The term member is not defined, but it generally means owner. A TFSA has one member; jointly held TFSAs are not allowed. Thus, a TFSA is a corporation or is a disregarded entity for US tax purposes. (2) If an entity meets any of seven definitions of a corporation, it is automatically treated as a corporation: a TFSA meets none of these definitions. (3) A TFSA, which is organized under Canadian law, is a foreign entity because it is not domestic. (4) If an entity does not meet one of the set definitions of a corporation, it is an eligible entity and the owner may elect that it be classified as a corporation or a disregarded entity for US tax purposes. (5) In the absence of an election, the default classification of a foreign eligible entity that has one member is as an association if that member has limited liability, and the entity is disregarded if that member does not have limited liability (that is, the member is personally liable for any of the entity’s debts even if he/she is indemnified for therefor). Because a TFSA owner is not insulated from any personal liability generated by assets held in the TFSA that lead to a cause of action, a TFSA by default is classified as a foreign disregarded entity for US tax purposes. A US person who has an interest in a foreign disregarded entity must file form 8858 every year.

                  In summary, the precise classification of a TFSA is not certain, but a TFSA is not a foreign trust because it is not an entity separate from its owner; thus the entity classification rules do not apply and no special reporting of the TFSA is required. Even if the entity classification rules apply, the default classification of a TFSA is as a disregarded entity for US tax purposes and a form 8858 must be filed annually. It is hoped that the IRS will clarify the issue once and for all.

                  In the interim, the safest option for a US citizen in Canada may be to file form 8858 annually. Alternatively, a taxpayer may write to the IRS, describe the nature of a TFSA, and request reporting guidance. Although the IRS has not yet replied to any such requests, this disclosure is simpler than a full form 8858 and may make the taxpayer compliant with his or her obligations.